Q1 2021 RioCan Real Estate Investment Trust Earnings Call
[music].
Okay.
Good day, ladies and gentlemen, and welcome to the real can real estate investment Trust first quarter 2021 conference call. At this time all participants are in a listen only mode. After management's presentation. There will be a question and answer session and instructions will follow at that time.
I would now like to hand, the conference over to Jennifer suit same.
On your Vice President and General Counsel you may begin.
Thank you and good morning, everyone I am Jennifer <unk> Senior Vice President General Counsel and corporate Secretary for Rio can before we begin I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on Rio <unk> website earlier this morning before turning the call over to Jonathan.
I'm required to read the following cautionary statement in talking about our financial and operating performance and in responding to your questions. We may make forward looking statements, including statements concerning Rio Ken's objective its strategies to achieve those objectives as well as statements with respect to management's beliefs plans estimates intentions and similar statements concerning.
Turning anticipated future events results circumstances performance or expectations that are not historical fact these statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward looking statements in discussing our financial and operating performance and in responding to your questions.
We will also be referencing certain financial measures that are not generally accepted accounting principle measures GAAP under ifr at these measures do not have any standardized definition prescribed by <unk> and are therefore unlikely to be comparable to similar measures presented by other reporting issuers.
Non-GAAP measures should not be considered as alternatives to net earnings were comparable metrics determined in accordance with IRS as indicators of Rio <unk> performance liquidity cash flows and profitability Rio Can's management uses these measures to aid in assessing the trust underlying core performance and provides these additional measures. So that investors may do the same additional information on.
Of the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward looking statements together with details on our use of non-GAAP financial measures can be found in the financial statements for the period ended March 31, 2021, and management's discussion and analysis related there too as applicable together with Rio <unk>. Most recent annual information form.
From that are all available on our website and at Www Dot SEDAR Dot com.
Thank you Jennifer thanks, so much for that opening and thanks to everyone for joining us today.
So pleased to be surrounded by Rio can phenomenal senior leadership team my colleagues cheating, Andrew Duncan John Ballantine, Jeff Ross all of our Harrison General pursuits, who you just heard from and Frank Smith, who I'll introduce you to on a few moments.
This is a team that leads the 570 members of the broader reoccurring group.
On this bold adaptable and entrepreneurial team is real cans greatest asset.
It made it significantly less daunting to navigate this very tricky environment I'm grateful for their support and constantly impressed by their innovation drive an unwavering commitment to our business.
As I focus on on the first quarter on the business environment I also want to share my confidence in <unk> long term value creation strategy on the search.
From a faster that's been brought on by COVID-19 are indisputably tough, but I'm gonna optimists by nature.
The metrics continue to be distorted a little by this pandemic, but when we reflect only on the current conditions, we're overlooking the vast number of levers for future growth that we have Rio can have at our disposal.
Our focus is obviously on responsibly managing through this crisis. However, we're also looking beyond it.
With the acceleration of this vaccination rollout, we will emerge poised to capitalize on the pent up consumer activity that will benefit our tenants and ultimately you our unitholders the.
On the existing conditions on short term and simply do not reflect or alter our long term growth potential period.
Now I'm going to focus on our Q1 operating results and despite force closures during a significant portion of the first quarter reoccurring collected a total of just under 94% 93, 9% of our rent for the first three months of the year and for April we were at 93, 6% of gross rents.
Rent collection will continue to improve as tenants received funds from search in Q, which have been extended out until September 25 2021.
Our rent collection has taken center stage in our results from the past four quarters.
No what I'm pleased to talk offense for a moment and shift our focus to our very strong leasing efforts were.
Seeing stronger leasing environment and this has been evidenced by our completion of $1 1 million square feet of leases and renewals in the first quarter.
For context, our new leasing in the quarter exceeded that of the same quarter last year, which was as you can all remember pre pandemic.
We completed 86, new deals totaling 435000 square feet. The average rent per square foot was $23 19.
Now on resetting statistics, because this is well above our portfolio average of $19 87 per square foot.
And a quarter over quarter demonstrates the trend in our ability to organically grow rents even in the midst of this pandemic lockdowns.
The resulting new leasing spreads of 14, 2% for the portfolio and 18, 6% from major market properties far exceed the pre pandemic results of Q1 2020 the.
The majority of these new leases were completed with strong covenant tenants, primarily value furniture home on a central retailers.
In addition deals were done with sit down restaurants, and personal service providers, indicating that while these categories have been impacted by the pandemic well capitalized forward thinking companies are seizing on the opportunity to lease well located space such as Rio Ken has to offer.
Furthermore, while the narrative around office leasing has been somewhat bearish over the past year <unk> has managed to backfill two units at young Shepherd Center this quarter alone totaling 22000 square feet.
Our leasing spread on the 657000 square feet of renewals completed in the first quarter was 5% leasing spread such as this are a clear indication of the healthy upside between our average portfolio and the market rents.
Our <unk> per unit, excluding the debenture prepayment costs was 36 from the quarter.
Given the ongoing pandemic and subsequent Lockdown. This result, while it met our expectations.
It was impacted by onetime G&A expenses that will not be present in the normal course, where core.
Confident that our encouraging leasing and operating metrics along with the absence of these onetime expenses.
On a result in organic <unk> growth over the next three quarters.
Our <unk> result, also reflects the $6 $4 million provision that we have to pay for bad debts in the first quarter as the pandemic subsides. This too will be a negative factor that will eventually dissipate sooner rather than later.
Same property NOI growth also continues to be impacted by the pandemic. We ended the quarter at negative four 6% largely due again to the pandemic related provision. It is important to note. The impact on same property NOI is the direct result of the immediate effects of COVID-19, and this is not a reflection of long term.
Reduction in revenue.
SPN NOI will also improve as we bring our occupancy levels back to their historic norm as of May <unk>, we rose to 96% occupancy a key milestone in our journey back to our pre pandemic norms of well over 97%.
Now we can't predict the length on the extent of the mandated closures, but more than 90% of <unk> annualized rental revenue is from grocery anchored mixed use and open air centers given their higher ratio of a central service tenants. These asset classes are more insulated from the impact of pandemic related lockdowns.
It's worth noting the close to 80% of our tenants are classified as strong or stable.
These are primarily grocery pharmacy liquor essential services and value retailers that have strong covenants and demonstrated a whole lot of resilience in volatile economic cycles. There is stability as highlighted by our collection of nearly 98% of these tenants total first quarter gross rents.
As always I'm realistic I'm not trying to downplay the volatility in the industry, but I want to be clear that the relative impact to date on Rio Ken's revenue, it's been manageable and we're positioned to see improvement as the impact of COVID-19 start to dissipate.
I'd like to briefly highlight our very active capital recycling initiatives.
<unk> on a sizable disconnect between public and private market valuations, we're raising capital efficiently by selling assets.
<unk> closed firm and conditional deals so far in 2021, we've netted proceeds of over $543 million.
At an average cap rate of 515%.
Assets range from conventional retail and mixed use to non income producing land.
We'll put the proceeds to good use allocating the capital towards paying down debt and funding development.
Doing so will set us up well for our future.
Turning to residential we collected over 98% of our residential rents in the first quarter, which we attribute to the desirability of Rio can livings offerings.
We also established a dedicated Rio can living department, which is solely responsible for maximizing the value of our growing portfolio of rental apartments and condominiums.
This team is comprised entirely of existing REO can't talent and each member has a tremendous amount of experience in residential including experienced a marketing sales product development asset management and residential operating operations.
Our REO count living portfolio continues to grow we've completed 755 condo units and two projects in Toronto, So far with our partners at Allied REIT Ametrope yet.
We also have more than 200 existing residential rental units across four buildings central and pivot in Toronto frontier in Ottawa and Brio in Calgary.
This quarter saw the successful closing of the sale of a 50% non managing interest in east central and commercial component of E place at attractive three 6% on $4 six capitalization rates respectively.
And this is based on stabilized NOI.
The transaction represented capitalization rate and a value far above our cost. This further underscores the strategic importance and net asset value growth potential of our development pipeline and residential rental business.
We're confident that all REO cam living offerings will thrive in the long term enhanced immigration and a resurgence in the economic activity should lead to a strong market dynamics going forward.
In addition to the completed projects I just referenced we have more than 4500 50 residential rental units currently under construction between six projects and we estimate we will have an additional 1014 residential units in different phases of development by 2023.
Total NOI from our residential rental operations will continue to increase as new projects are completed throughout the course of this year.
We also have three condo projects comprising nearly 250 units currently under construction.
On the proceeds from these condo sales provide an alternative source of revenue and an important bridge <unk> to supplement our very productive core commercial portfolio.
Rio can living projects remain a cornerstone of REO cans development program.
<unk> development represents almost 83% of our nearly 42 million square foot development pipeline during the quarter real Ken's development team completed 30000 square feet of development, primarily primarily related to the first phase of the retail component.
Winfield farms site in Ottawa, Ontario.
First retail phases, just about 90% leased to grocery and other necessity based retailers. It's part of a much larger Winfield farm mixed use development. The <unk> development with our partner tribute community. The development includes 392 units of Townhomes in three phases. The first phase is complete on the second phase is under construction in <unk>.
100% pre sold.
Construction on the first of the three condo towers is also well underway in its 500 units or 100% pre sold as well.
Success of retail leasing on residential sales of Winfield farms site with profit margins of up to 23%, while it's simply illustrates REO gains ability to generate net net asset value growth in all circumstances.
Moving to downtown Toronto construction of the 36 story office tower at the well remains on track for initial tenant possession. This year and approximately 85% of its $1 2 million square feet has been pre leased to strong covenants of tenants, including shopify.
Approximately one third of the 340000 square feet of retail space has been leased to forward thinking tenants that really do reflect the vibrancy of the King West neighborhood.
Highlighting the progress of Winfield farms, and the well to emphasize <unk> ability to create exceptional and successful communities in any context suburban or urban commercial or residential we've got the creativity and sophistication to create value.
The overall pace of REO gains mixed use development projects was not significantly impacted by the pandemic and development spend for 2021 is estimated to be in the range of $500 million now.
Now this spend in future years is targeted to be a little bit lower due to the completion of a significant portion of the well in 2021 as well as staggered development starts and of course, the sharing of development costs and risks with strategic partners.
As always we continue to look ahead to ensure growth through sustainable development, our pipeline of zoning entitlements as one of the largest in the industry and as we complete developments, we break new ground. So we break ground on new ones achieved zoning on others and initiate the zoning approval process on still more on our pipeline translates into lucrative opportunity.
He is a proven and virtuous cycle that will continue to be demonstrated through 2021 and long into the future.
We'll use our vast pipeline of air rights, and we will seek out partners to enhance value reduce our overall development exposure and equally important to get paid for our deep and experienced development and residential platforms through equitable fee structures.
Sure.
While our focus continues to be on managing our business and tapping into opportunities our commitment to sustainable growth Hasnt diminished Rio can continues to lead the Canadian real estate industry and the ESG.
We're recognized as one of Canada's greenest employers in 2021 direct acknowledgment that we're leading the nation in creating a culture of environmental awareness.
We recently published our first Green Bond report confirming the full allocation of the net proceeds of $348 million from our inaugural Green bond issuance.
We also announced an exciting new partnership with context and collaboration with the city of Toronto and THC to develop a mixed use masterplan community at Queen and Cogswell in Toronto.
The project will provide vital retail amenities and add much needed housing for all income levels. In addition, it will contribute to Toronto community economic development initiatives, including $100000 scholarship funds for affordable rent tenants at $250000 economic and social development fund and a minimum of.
$500000 in value for job opportunities.
Rio can also completed key diversity equity and inclusion and inclusion initiatives, including a governing charter and our first ever dei employee survey.
We're going to continue to build our momentum and take action to maintain our status as an industry leader in sustainability.
With that I'll pause and turn the call over to cheat to discuss our first quarter financial performance in more detail over to you.
You, Jonathan and good morning, everyone.
You all for joining us.
When COVID-19 was declared a global pandemic more than a year ago feel effect anticipate that things would carry into 2021.
All the engine gives you insight into the rollout of the vaccine.
Endemic continue to impose challenges to the retail sector based on <unk>.
Number of lockdown throughout the first quarter of 2021.
As Jonathan highlighted despite this operating environment real Ken delivered strong Q1 operating results, including leasing rent collection and development progress et cetera.
Now, let's take a closer look at debt drivers on our FX flow per unit for the quarter.
Q1, 2021 asset flow per unit was <unk> 36.
Excluding the 7 million debenture prepayment cost.
This was <unk> <unk> lower than the 39.
For Q4 2020.
This quarter over quarter change was largely driven by a one time from five 8 million January administrative expenses, which were mostly related to the accelerated expensing of certain unit based compensation and represented approximately <unk> <unk> per.
Unit.
The remaining change was primarily due to lower residential inventory gains and lower lease cancellation fees, partially offset by a low pandemic related provision.
During Q1, we continued to service value on our portfolio through capital recycling when on the most efficient and effective sources of capital for real cash to fund value creation initiatives such as development.
As Jonathan touched on earlier year to date, we have in aggregate 543 million of closed all firm on conditional deal.
This includes 421 million of income producing properties.
We did on average capitalization rate of 515% based on in place NOI.
About $122 million I'll skip on them on properties with knowing in place NOI.
These deals demonstrate the quantity of real cash assets as evidenced by the pricing negotiated and the well established partners. We have attracted in spite of the challenging environment I'm going to piggyback.
We remain committed to our development program and unlocking the significant value inherent in our portfolio.
The vast majority of our pipeline is focused on mixed use residential development.
It will serve to diversify real cash income while addressing the growing demand for housing as Canada's population growth, particularly when the gunmen reviewed immigration plan.
The Canadian government is targeting to welcome more than $1 2 million immigrants over the next three years.
This will further drive demand for real estate and retail and residential growth post the pandemic.
We manage our development program prudently, we expect to keep total <unk> value of properties under development and residential inventory on consolidated balance sheet as a percentage of total consolidated gross book value of the assets.
Net.
Under 10 times, 10%, despite the 15% limit permitted under our credit facility agreement.
As of the core to end this matrix was 10, 7%.
Our development program consists of both residential rental and residential inventory project.
The lateral refers to condominium a townhouse development.
In addition to meeting market demand for housing ownership condominium on townhouse projects enable us to accelerate capital recycling to further fund our development program.
Currently such projects under construction are pre sale include UC, Uptown and UC tower at our Winfield funds development.
11 widely in Europe wheel, and QA condos and cleaning on comps low all in the greater Toronto area.
This project estimate to provide 133 million to $148 million in inventory gains over the next four to five years based on more projects under development.
The first three project effectively 100% free sold and are under construction was our new QA condo project is already 89% pre sold.
Now, let me turn your attention to our balance sheet metrics.
Real can continue to maintain ample liquidity.
As of the core hand, our liquidity stood at $1 3 billion in the form of cash on cash equivalent.
Andrew on committed revolving lines of credit and other credit facilities.
Subsequent to the quarter the trust extended the maturity of its revolving unsecured operating facility by two more years to the end of May 2026 based on all of the terms unchanged.
Our mortgage maturities for 2021 total $380 million.
Right now only about 102 million remain to be refinanced.
Due later this year and I expect it to be refinanced in due course.
Overall, we expect to continue to maintain strong liquidity throughout the year.
In addition, we continue to have a large unencumbered asset pool of $8 7 billion on proportionate share basis.
Which generates close to 60% of our annualized NOI and provided two two times car range for our unsecured debt as of the core Act on.
Also at the core and our debt to adjusted EBITDA and <unk> increased from the year on to about 10 times.
This increase was primarily due to its 12 months rolling nature vs Q1 results, reflecting full quarters impacted by the pandemic versus only three quarters that were impacted by the pandemic in the yen metric.
Debt to total assets was 45, 3%.
While we expect these two debt matrix to increase marginally in the near term real can maintains its long term goal of keeping leverage and debt to adjusted EBITDA within the targeted range is lower than 42% and eight times respectively.
Real can successful capital recycling program and ongoing improvements in operations we're on.
Served to reduce these matrix over the medium term.
Ultra long term real cash targets to shift its unsecured versus secured debt compensation to 70 30 on a proportionate share basis.
This transition will take time and will be balance quite a reading implication cost of debt debt ladder and liquidity needs.
As of quarter end this ratio was 56 versus <unk> 44.
Real Ken is committed to a disciplined approach to maintaining its balance sheet and capital structure in order to maintain strong liquidity and financial flexibility.
This has served a real count well over 27 years of history. It will continue to position real Ken well to navigate through the ongoing pandemic and provided the ability to investing on accretive initiatives to create value for the long term.
Finally, before I turn the call over to Jonathan for final wrap up I would like to conclude with a personal note of appreciation and gratitude as you know this is my last quarter conference call a real Ken.
It's been on absolute pleasure working with and knowing many of you over the last five years. This includes my entire team, although my real Ken colleagues, the real Ken Board of Trustees, our unit holders the research analysts who cover us and the investment community that follows.
I would like to say a special thanks to our founder CEO and industry icon. Mr. Sunshine, It's been the immense privilege to have worked alongside him over these years.
As he takes on his new role as real Ken <unk> Chairman. He has led to real Ken in Green on your Jonathan's leadership.
I wish Jonathan on the entire real can team all the best in the years to come.
I'd like to turn on the call over to Jonathan for his closing remarks.
Thanks, <unk> and thank you for your significant contributions over the last five years.
Lastly, I want to thank you on express my appreciation for all that you've done for Rio can which has been so significant on behalf of the entire organization and our board of Trustees I wish you. The very best in your next step and thanks also for ensuring a seamless transition as we complete the search for a permanent CFO.
We're progressing well in our search and we anticipate announcing a permanent successor funds of third quarter of 2021, I am pleased to announce that Franco Smith current Vice President Finance Brio camp will serve as interim CFO effective may 12, Frank has been with <unk> since 2017 and brings over 25 years of finance and accounting expertise.
She is a respected leader with exceptional knowledge of the trust and our industry from.
<unk> has a proven track record and we have total confidence in her ability to lead our exceptionally strong finance team and to support <unk> value creation initiatives.
So now to wrap this up before we turn the call over to you for questions I want to emphasize how proud I am of how we've navigated this challenging time.
This past year has highlighted the strength of our foundation, our resiliency and our incredible talent now is on.
On internal Optimist I look ahead confident that consumer trends are going to continue to ship favorably when well located inherently value rich assets and a compelling growth strategy or in the hands of a responsible innovative and entrepreneurial team like Rio can they will thrive.
A privilege to lead this incredible team and to have us well positioned portfolio to create value for you. Our unitholders. Thank you and now we're happy to respond to any of your questions. So Don over to you to open it up for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press star key on your Touchtone phone.
If your question has been answered or you wish to remove yourself from the key please press the pound key.
For our questions.
Okay.
Your first question comes from the line of Mark Rothschild with Canaccord.
Thanks, Thanks, Good morning, everyone. Good morning.
It appears that in the first.
Quarter on heading into the second quarter asset sales are accelerating some of the development assets could you just give a little more color on what you are selling and more significantly does this give any evidence of pricing for stabilized assets that you could talk to the values.
Sure. So we're selling actually a wide range of assets.
There are some that are development land. There are some that are income producing retail assets. There is some as we as we announced earlier like D play from the central that are mixed use it really ranges and some of them on primary markets. Some are similar to the ones. We sold a couple of years ago in secondary markets.
And I think on what we're seeing is a reflection of the of the value of retail assets and mixed use assets, but primarily retail assets.
Which I think from the last year have seen a bit of a slowdown just because people weren't certain about what the lending environment was and I think people were trying to figure out where retail fit into the overall landscape, but I think announced serves as a very interesting value proposition for a lot of investors Bofa syndicators, bofa small pension funds BVA institutional or even high net worth.
Individuals, who really like the prospects of retail assets. So we're seeing a number of different types of buyers on a number of different types of assets. So given the number of transactions we have in the hopper.
Very hard Mark to pinpoint one specific type of asset or archetype of asset that can answer your question Thats really wide ranging.
Is there any way to draw any conclusions on any change in values coming out of debt.
Compared to perhaps a year ago or youre on a half ago.
Well I think I think there was a lot of uncertainty around where values were over the last year during the pandemic because theres certainly werent a lot of trades and I think people were scrambling to figure out exactly what the what the appropriate benchmark for valuing retail assets.
And what we're tending to see quite honestly is a reversion back to values that were pre pandemic.
I mean I'm not talking about in closed malls those are a bit tougher to value at this point, but certainly for open air centers and for land and mixed use properties, we're seeing reversion back to pre pandemic and in some cases I'll be honest, we've been quite pleasantly surprised that values are in excess of where they work for certain well positioned assets that Hudson.
Development potential.
Okay, great. Thanks, and maybe just one more enterprise to G&A or some bad debt provisions are there any more onetime cost or a COVID-19 related costs. We should expect in Q2 or that you know of this year.
Key on command that over to you for sure Mark can you is there any bad debt Q2 ways.
Realistically, we will still have zone, we're hoping to be lower depending on the closure expense.
You saw the grade to rent collection results, which have parity and dedicated G&A as we mentioned we this quarter in Q1, we do have that five <unk> net special one time, we start turning non expected to compete on export early in the future quarters.
But we are definitely I mean, it's hard to tell right now exactly what kind of provision we would need to take but I've got to think that.
Particularly looking ahead of what we hope to be a reopening fairly soon.
The bad debt provision will continue to dissipate over the course of the <unk> She said.
Great. Thanks, so much.
Rob and Mark have a good day.
Your next question comes from the line of Dean Wilkinson with CIBC <unk>.
Hey, I guess, Hello, Jonathan Goodbye Chi.
So here for this call.
We already we already Miss you.
I actually did have very similar questions.
So I'll call that great minds think alike.
When you look at those dispositions and debt.
What you've completed so far at the low four.
That's a 125 basis points inside your ISR as cap rates from 200 basis points inside of where the market is kind of pricing the units.
How much of that do you think was location specific.
And how much of that is perhaps the market is is.
Overestimating, what cap rates on on these kinds of transactions ought to be and where would that have looked like maybe six months ago datacenter that.
Sure I mean, I think some of these are very well positioned assets.
The very low cap rates are driven by their.
Unique unique attributes one of the assets again as a young of magnitude I mean, it's part it's part multi red so that that was obviously, a very low cap rate, but the other stuff that we're selling again I think it is it is really a reflection of the view on retail which is a lot better than perhaps the public <unk>.
Are demonstrating their view on the values of these assets I think if anything the last 14 months have demonstrated that these open air centers are exceptionally resilient.
Our rent collection, if you look at it just in our open air centers, we're looking at our strong and stable tenants, which makes up a large part of our portfolio.
They're doing very well and they've done very well in the last in what is arguably the worst landscape that we've seen in many decades and I think when you take that and you compare it to the values of competing.
Competing asset classes like multi res or industrial retail tends to be.
It is overlooked and I think it's now it is a recognition that it's a very good place to place money. So we are seeing a flow back into the sector, which is great for us I mean the.
The list of assets that we're selling does not even come close to being to reflecting the demand that we're getting just on inbounds from people wanting to buy assets from us. There's only so much we are willing to sell so I think there has been a fair bit of attention turned back to retail and I think thats debt that augurs, well for us and our peers, who only is very well positioned properties.
I think that makes total sense.
I'm, assuming a lot of that is there's been an abundance of private equity raise.
Bidding on two cap residential it doesn't make sense for them.
Would that suggest that perhaps you could turn into a bit more of a capital recycler, if those prices or right or are you comfortable with the disposition program as it sits well the good news of our REO tenants. We've got options, if we wanted to recycle capital and more.
On a more aggressive fashion, we certainly could but it really depends on what we can use that capital for.
We're in a good position, where we have more retained earnings based on our distribution reduction from last year, we're reducing our development spend a little bit next year and our operations again, our team is doing such a great job of both reducing expenses across our sites, but also Jeff and his team have done a remarkable job enhancing rents across our sites. So we might.
Not be in a position, where we need to raise tremendous amounts of capital going forward. It all depends on what we can use it for and if there is an accretive way to use that money then yes, we can turn on the spigot it anytime in a market like this and recycled more assets from a qualitative perspective, though I will add Deane and I think it's important to note that we will continue to prune our portfolio and make it.
Better by subtraction.
We still have some assets debt from our same property NOI perspective drag us down a little bit and if the opportunity arises we will certainly look to sell those assets and ultimately have a better portfolio for it and then from the development side. We've got a lot of very strong assets that serve as very good retail assets, but also have a true.
This amount of upside from a development perspective, and as we've stated clearly before it's our intention to bring in cash.
Capital partners on those types of assets fairly early on to.
To both validate the value of the air rights, but also to mitigate our risk in the development and to get some fees from that from that investor too.
Ultimately help give value from our platform.
So there is there's definitely.
I mean, we feel very good about the values out there and we think that they are generally understated or underappreciated by the capital markets.
Great. That's my two I will hand, it back for for some of the others. Thanks again, thanks, Steve.
Your next question comes from the line of Sam Damiani with TD Securities.
Hey, Sam.
Hey, Jonathan Congrats on your new role as CEO and Chief.
We've already spoken but again wish you all the best in your next step.
Just wanted to just wanted to start off on on it.
So your outlook for sort of.
Remainder of the year in terms of same property NOI.
I believe you mentioned does it same property NOI was positive, which I think no one would be surprised.
But if you exclude bad debt expense what would be your view on on.
Appropriate NOI growth for perhaps the second quarter.
We're not really giving guidance on that C&I for the second quarter at this point, Sam I mean, what I can say is that our outlook is favorable I mean remember too that we're lapping Q.
Q2, 2020, which was true.
Non our finest moment.
Given.
At the outset of the pandemic. So I can tell you that of generally say it should be definitely a favorable conclusion of the year for us from from many from the standpoint of many metrics, including SP NOI, but we're not really giving guidance at this point as to exactly where it should trend, but we do believe we will confident Sam that it will trend in the right direction.
And continue to trend on the right direction.
Okay. That's helpful.
And then on the disposition program, which it's great to see it ramping up and renewed interest in retail properties.
I just wanted to clarify the comment that I think you've made on your opening remarks that the average cap rate was five 5%.
On the full $543 million of activity year to date, including.
Excluding land.
Non including land is actually if you include land is much lower than that but only for the income producing components Sam.
Again, we did much better because a lot of the land that we sold has no income as you can imagine so the the combined cap rate would be somewhere Andrew I'm not sure. If we have it but some are lower and the force around core low force, yes, yes that makes sense.
Expense and all of these values in line with Euro for US was there was the <unk> mark in the quarter.
Due to some pricing that's been firmed up on some of these deals.
A little bit yes, but.
Sometimes we have been pleasantly surprised by certain transactions, where they are in fact better than our FRS cap rates, but generally speaking they're in line.
Okay.
Last question from me is just on the goal of setting your debt.
Debt structure at 70 30 unsecured secured.
Is the reason for that and the timeline that you expect to achieve that.
Sure I'll start with the timeline.
Imagine Sam will take quite some time, it's not one of those things, we could turn on or off immediately.
So.
It's probably a couple of years before we can come close to that objective.
And the reason for it is we just think it's prudent capital management in this environment.
It gives us a lot more flexibility and I think it also helps with our debt metrics and our <unk>.
Our debt ratings at the end of the day.
We will store, we intend to very much favor <unk> financing on our mixed use property. So we will continue to focus on getting our secured financing bucket filled by those types of transactions and of course, we own a lot of will some properties with partners, where we will let them govern our secured financing strategy there.
But otherwise where we can we're going to focus more on the unsecured market for a little while.
I'll turn it back.
Alright, Thanks, Tim.
Okay. Thank you.
Your next question comes from the line of <unk> with National Bank Finance.
Hey, How's it going.
Fantastic how are you.
Okay, let's talk a bit about the well if we could.
Yes.
Redwood towers that you guys own.
When when will all of those finish.
So Andrew I'll hand over to Andrew <unk>, who can give you some more color on that hi, Tom. Thanks for the question I guess I'll answer your question in two phases, where we anticipate closing all the remaining air rights.
On those transactions. This year, we closed three of them already and there is another three.
<unk> deals to close and then in terms of occupancy there all those buildings from a condo perspective on a rental perspective are occupied in the later half of 'twenty two out to the beginning of 'twenty four because you can imagine they are all different heights, and Theyre, all kind of occupying in different phases.
Okay and.
I guess, what I'm wondering is that youre still going to be.
Very much under construction for the next several years there are the next few years there.
How should we think about how that will impact like leasing the retail portion.
Do you expect that.
We should expect to see that.
On the other commercial part kind of grow as those buildings are finished or.
Do you think that.
Actually you know what we will start day.
Right.
It's a finely tuned process, where we are focusing on ensuring that there's as little disruption as possible I'm going to hand, it over to Jeff Rogers to talk about some of the discussions you've had with the retail tenants on why we've mitigated any real material concerns about the phasing Jeff thanks very much so.
We've been very quietly but actively working on in the world for a number of years as everybody knows what they probably haven't seen is that we're probably in the neighborhood of about 40% leased on the retail leasing side of things and with negotiations we have going on now.
That's going to substantially grow through the second part of this year.
There is a bit of a slowdown there is no question because some of the Americans and we were talking to really need to lay eyes on the actual development and get feet on the ground. We feel that we've got a good chance of that happening in third and fourth quarter of this year as the U S starts to loosen up a little bit as soon as the <unk>.
Border if it comes a little bit more porous they will get up here, but we're actively negotiating deals.
Conditional on then coming up and actually seeing what were producing but from what we have in the hopper now I am pretty confident that as we kind of break out of 2021 and into 'twenty. Two we will have a substantial amount of the retail done by the middle of next year and as Jonathan said it is a finely tune.
Dance that we're doing because as we get closer to this day turn it over we're getting a really strong interest and thats really to start to generate the higher revenue from the smaller retail units that we have so we're pretty confident that we're heading on the right direction and I think just to conclude that.
The completion of the buildings again, Andrew and the development team have done a very good job of ensuring that we've put in process ways to internalize all of the construction of the remaining residential buildings. So the only thing that will be remaining at the time. There is an opening of the retail sort of a.
At the end of 'twenty two is the odd hoist that will be on the outside of buildings, but will really be out of the way of the retail. So we feel very confident that when we set our sights on on opening dates that we promised to retail tenants. They will have very little obstruction on their way to operate their businesses Accordingly and.
We've stage to the core restaged with such that those those things on Orion.
Okay, and then I guess my next question is just sort of the same question for the occupancy you guys are net.
Or do you have an 85% pre leased on the office side.
Whats your stabilized occupancy for that building and how quickly are you are.
Are you thinking you might get there.
It's a better question for Michael I, Murray and the team at Allied, but we're confident with I mean, they have been extremely active even in the face of a bit of a challenging office environment. They are still doing deals impact did one last month, which was which was again a strong deal.
In terms of putting a specific timeline on it.
Same it by the time, we open.
The project opens on the latter stages of 2022, we fully anticipate being stabilized what does stabilize mean, there I mean, I would I would say around 97 or 98%.
Okay, and then just lastly on the <unk>.
Retail.
Right.
Collection rates have sort of been.
Across the industry or at least the publicly traded guys have sort of been in that sort of low mid 90, 90% range.
Can you hazard a guess about when you expect those to start to improve.
I really think that the the linchpin to all of this will be the reopening.
And we've done a lot of a lot of research on what's happening in the U S, which is a good.
A pretty good litmus test right now.
And what we're hearing from our landlord peers as well as retailers down there is that things are by and large in particularly in those areas that have been opened for a little while returned to normal rent collection numbers have improved significantly and I think we will follow that trend, but it really does depend on the vaccination rollout my sense is that.
By the summer and then certainly by the early fall.
Youre going to see consumer activity returned to a very active pace in fact higher than pre pandemic phases, which will put our tenants in good stead and what's nice is I mean depends on if youre a taxpayer, but what's nice is that the government is bridging the gap for a lot of our tenants that are forced to close by the extension of the.
Service program to the end of September so by the end of that by the conclusion on that program I believe that we will be in a stage where rent collections will be far more normalized would be at our historic norms of 99, 5% rent collection each month, probably not by then but we're confident that by on as we roll into 2000.
Two we will start getting back to those heightened numbers again.
Okay. That's great very helpful. Thank you no problem have a great day.
Our next question comes from the line of pardon me.
With RBC capital markets.
Hi.
Hi, Thanks, good morning.
Nice to see the activity pick up in terms of leasing, particularly on on the spreads.
Specifically, the new leasing spreads.
Sure.
Based on maybe what's in the pipeline and hopefully full reopening later this year can you maybe just talk about your occupancy outlook and then secondly, I am just curious, how perhaps leasing costs and <unk>.
Retail net effective rents have been trending relative to pre COVID-19.
Yes, I'm going to hand that over to John balance on our head of asset management is to give you. Some more color on that yes, I think pardon me based on the activity we're seeing now.
The pipeline that Jeff Scott going.
We do expect our occupancy to get up to our more historical norms by I would say.
Mid next year, what I would say, though is.
We do have a bit more inventory right now to lease and we're not just trying to fill it up with any patents were obviously trying to do so with tenants that had been resilient throughout the pandemic.
And I think the essential based tenants are the ones, we're really doing business with right now and we're going to continue to do so so.
We will take our time, a little bit more we're putting more money into our shopping centers to ensure that not only are we selling space, where we're filling it up properly and I think you also asked about the net effect of rents on how much capital, we're putting in and Jeff I don't know if theres a trend to have to heighten our <unk> at this point I think on trend, we're probably a little bit higher than the.
Normal but.
I don't know what Youre, just a very little bit, but what we're really doing is we're doubling down on a qualified on the tenants that we're putting those additional capital out too so were more stringent than ever before on understanding where the ti is going but we're not seeing a massive jump in if there is some structure around.
Some free rent in perhaps.
Doing it that way, but the other thing we're really ensuring is that the cash tenants wherever possible are putting their own capital in as well. So they're representative they've got skin in the game. So the answer is yes, maybe going up a little bit but not a lot.
And just on the.
Click on the renewals and you've been or even I guess on some of the new leasing have you been maybe.
As far as the year, one increase maybe giving you a little bit of a obviously, a lesser or a bit of a break on the relative to market, let's say, but then maybe trying to incorporate.
Whether it's annual or more periodic escalations in the terminal lease yes.
Yes.
Been a theme that we've been focused on even before the pandemic, but certainly now we.
Put a lot of pressure on our leasing department and they've responded quite well on not only getting five year bumps, but actually on annual bumps.
And even though it's been a tricky environment they've come through quite well. So we're all about growth for the future. We are really trying to embed that in our in our philosophy is when we do any sort of activity, but most importantly leasing to.
To ensure that that growth is consistent and sustainable and so.
Jeff and his team have done a good job of working those in now of course, we can't do that in every lease and certainly some of our renewals are fixed so there's only so much flexibility you have but wherever the opportunity arises we will.
Again, we'd like to hold our net rents in year, one but in some cases, we'll we'll give a little bit on the first year, if we can get sustained growth going forward.
Got it.
Maybe switching gears to the well and the <unk>.
I guess completion later this year and just maybe if you could just clarify how the cash NOI impact will flow.
Low.
I guess on the initial phases of completion later this year.
2022 is there some maybe color you can provide on on that specific project.
I'm not sure if we've disclosed exactly what the flow of funds from the well but.
I think I think it's really.
It's sort of logically follows the tenancy possession. So I mean, I think the office will start.
Kicking off some fairly sizable NOI by the end of this year and then the retailers will follow by the end of 'twenty two.
And then of course, the residential we own are we yes, we know 50% of the largest residential building. There that has around 600 units that is going to be income producing probably at the beginning of 'twenty. Three so I can't give you specifics Tommy but those are generally the.
The touch points that you would follow in order to determine.
What kind of NOI activity will happen from that from that site.
Got it.
Just one last one and maybe Jonathan going back to your comments around FX loan growth.
Picking up against over the next few quarters.
Any comments on how you think the full year may shape up.
Not giving guidance on at this point again, we're very I can give you. The overarching statement that we're very confident that <unk> will continue to improve particularly as a result of this pandemic.
Dissipated and we do feel very confident.
But that is something that will that will help us dramatically. We've also got developments that will be.
Be completed as the year goes on that will also add to our <unk>. So again, there will be growth, but in terms of giving you guidance on what that ultimate number will be we're not we're not off from that at this point on me, but we're confident in the ability to constantly grow it.
Great. Thanks, very much I will turn it back thanks Bonnie.
Your next question comes from the line of Jean Marc with BMO capital markets.
Hi, Jenny Hi, good morning, and congrats to you Jonathan and also to change for the next step in your career.
With respect to the G&A wanted to confirm that any costs related to the changes at the C suite were incurred in Q1 21 for Q2.
It should be a cleaner quarter Hershey on as far as we know right now.
Firm.
Okay, Great and Q4 it starts on a good run rate to look to in terms of a normalized quarter on G&A I recognize that it's been a little bit bumpy, we able to pass that over the last few quarters.
John If I may ask you about Q4, you still have to add back some of the nuance that means because last year because of COVID-19.
We actually lowered the.
Bonus accrual for example throughout the entire organization. So this year, even though it's still underpinned on makeup. We certainly think it's hopefully it's better and of course the budget already on their flagship client extend the pandemic effect.
So it is not fully especially probably use Q1, where we just reported and remove the one time actually talk to them.
Okay, Okay, great Thats helpful.
Back to.
Missions.
In the MD&A, you talk about an enhanced disposition target.
I Didnt see a specific number but I'm wondering if that commentary reflects what we have what we know to date as far as what you thought.
Sold and contracted or is there sort of a bigger target for the full year like how should we think about dispositions for the second half of 2021.
So what we've disclosed is what we currently have in the Hopper. There are other transactions that are being contemplated but of course, it's an unpredictable market you never know what will close on mobile go firm, but I will tell you that there will be growth from that number.
Assuming all works out in the current deals do close then there will be growth above what we've disclosed will it be material growth I wouldn't say, so but there will be from other activity in the latter part of this year.
Okay. So it's fair to say that that's front end weighted then on dispositions.
Okay great.
And Jonathan you talked about places to reinvest that capital and possibly taking advantage of strong pricing on the market I'm just wondering notwithstanding that the stock's up 25% year to day is there a contemplation that unit buybacks make sense from a capital allocation perspective.
One of our options for sure Jenny I mean, right now we are focused on making our balance sheet is strong.
As strong as possible.
And so our initial focus is going to be to pay down the debt a little bit and we obviously have a development pipeline that adds huge amounts of value going forward. So we'll fund that but.
Looking at everything in balance and that all out.
On the CIB, it's still at this at this we think very undervalued stock price.
Very accretive and very prudent thing to do but again, we're going to wait and see how the other metrics fallout. After we get the proceeds from these sales and then we'll make that determination, but it is a possibility.
Okay great.
With respect to the rent collection.
Strong number considering a fifth should tenants are closed right now.
You have a sense of.
How many.
Our tenants are eligible for starters.
What's kind of closing that gap between that between your core tenants and their ability to pay rent.
Yeah, and I'll also remind you is pretty good in the sense that the 80% that are opened and a lot of them are open with restrictions to in severe limitations on what they can sell so.
And on the face of this environment, we're pretty pleased with it but I'm going to turn it over to Oliver Harrisons to address the.
Quick question on the rent collection and.
And who makes up the service category.
Well, primarily as a service program is targeted.
At the tenant base.
I would say just based on anecdotal conversations with them.
And then the resulting rents.
Rent collection statistics from those categories.
Our broad base of that group is utilizing the program and the program is actually.
Efficiently flowing through to them and them to us.
It is let's say on mix.
It makes it a bit challenging as the fact that it is sort of done in arrears. So there hasnt been a bit of a lag effect.
We're seeing rent collections coming in from these tenants, let's say in April the relates to.
Q4 2020.
But the program is working for them, but we do not have any specific specific.
Yes.
So it's not something that youre formally tracking or have agreements with tenants in place in terms of <unk>.
Getting that first money flow through interbank payments is that fair to say well we have agreement debt.
And so we fully anticipate getting not only the service payments by 100% of their reps and we are we are keeping close tabs on all of those tenants that we know to be <unk> eligible and we've got an ambassador program that allows them to get our assistance to help them with the somewhat confusing process.
But we do still have I think specific statistics at our disposal right now, but there is.
Definitely no, which tenants are eligible for <unk> on which ones are eligible for other government assistant programs, but thankfully we've had fairly broad umbrella of tenants not just the independents. There's also smaller franchisee tenants that benefit from it as well we also though.
Is there a legal requirement is to provide a landlord with the money that they are collecting through the service program.
Otherwise the CRA will come after the debt.
No I'm on.
That's right.
And then finally.
On construction costs and what we're seeing.
<unk> across the board in sort of a lack of availability.
Buyers on trade are you starting to see that day.
And on project and I view.
Are you thinking the development yields are sort of how you underwrite.
<unk> going forward.
I'm going to turn that over to Andrew on the specifics around elevated construction costs on the license certainly hit on the what's it doing to our our outlook on future projects.
Jamie Thanks for your question I think I'll answer it in a couple of ways, one where on a fortunate position right now on our development pipeline, where the majority of our projects are 100% tenant and contracted so we're seeing it in the market and we're seeing it through suppliers on those projects, but not per se to Dubai.
Got some projects, we're looking at kicking off sometime in 'twenty, two and we're actively pricing those projects right now and trying to appropriately mitigate the risk by adding contingency on the escalation side.
We're not specifically exposed at this moment are we seeing it generally in the market. Yes. There is a lot of construction starts there is one on what material increases, but we are adequately pricing those risks into our estimate at the time.
And as for the second part of the question Jenny What I'll say is that <unk> is uniquely positioned we've got a lot of asset service development prospects that are income producing and so we can make the decision to render the conclusion base.
Basically right up until the day, we start demolition as to whether or not it's viable. So if we sense that the market for rental is just not where it needs to be and costs are elevated to a point, where it's just not a viable project. We can pull the plug on it and still have a very valuable and very active income producing retail asset.
That's from the most part we do have some greenfield properties, but.
The typical real can development site is one that is quite productive asset. So we always track these things and Andrew and his team do a really good job of keeping our finger on the pulse of it and that gives us the ability to make split second decisions on whether or not to start or not on some of these projects.
Okay great.
That's all from me. Thank you very much great have a good day day.
Your next question comes from the line of Howard Liang from readers.
Hi, Howard.
Hi, there.
I just wanted to turn back to renewals.
And talk about the retention rate I see in the comment in the MD&A.
He pointed out that low retention rate, that's really due to one tenant.
That.
A lot of space.
They were paying lower than.
Market rates is that fair day, they were one of those potentially vulnerable tenants like maybe it department store.
No actually it was a very strong tenant that we disclosed.
But.
It's a very well covenanted tenants that just again.
Turning to the market and felt that it was a store that wasn't a logical for them, but it was actually on all zellers lease that turned into a it was bought by another party. They opened and then they just on the store was available for them, but the good news there Howard is that we've already managed to backfill the majority of that space.
At higher rents so while it did impact our retention numbers for this year it will actually contribute to our growth going forward and so I think it's wise to look at our normal course retention, which is closer to the 85% range rather than this which we feel is anomalous, but ultimately net net this is a win story for us.
We're going to do far better with that space like I said in the hands of someone like Rio can we can do more of a space than perhaps others.
Right right that makes sensors, you should get that lift.
With the new tenant.
When you think about the tenants that arent renewing kind of that 15, I guess normalized 15% ish.
Are they more so, especially in the past few quarters have been related to potential vulnerable bucket for the most part or are.
Are they kind of a mix.
All kinds of tenants.
I'm going to turn that over to John balance on yes.
Yes.
That's a pretty good classification, we always have typical turnover at Rio can sometimes it's wanted and sometimes its unwanted to the extent, we can still refine our tenant mix, we will negotiate some tenants. So yes, we did lose some vulnerable tenants on the way through but we also are clearing some space to put into <unk>.
That would be more beneficial for those centers over the long term.
Okay.
That's helpful.
Do you see I guess.
Part of those bundled dependents day should benefit at that.
Hopefully it will be open so.
Can we expect maybe a higher return.
Rates from those tenants going forward or is that what youre seeing already now.
I mean, the broadness of that category suggests that we're going to see different stories on so.
On many different levels I mean, some of those potentially vulnerable tenants are actually very viable tenants that we want to maintain in our portfolio a lot of them are restaurants that make up a key part of our downtown mixed use development and even though they're suffering now we want them to renew we want them to be there.
Some of them are moving theaters and gyms that might not have the ability to renew so it's hard to give you a consistent answer in that regard.
We will there are certain categories that make up part of that.
Potentially vulnerable like let's say fashion, where we do believe that the renewals there will start to get lower and lower on lower but thats by design not by choice from Rio can we do we have.
Our market effort to get our exposure on apparel tenants down to sort of somewhere around five or lower 5% on lower so if unless they can meet the terms that we really want on renewals, we're just telling them that they can seek other premises.
So it's hard to give you a consistent answer across that entire category.
No I get that.
That's still pretty good color.
Just one more on renewals from me I guess can you remind us again on how those pics picks.
<unk> renewals.
The day more leasing spreads how how that price that were habits.
Determined.
Yeah.
On sorry on fixed renewals their contractual so they're already baked into a lease and we know about the mylan advanced on budget for them.
And.
Obviously, when they are not fixed it's a negotiation and it really we've been very fortunate in being able to achieve rents in spreads that are higher than our existing.
On market rents.
Embedded rents, we think that that mark to market not only on our renewals, but on our on any vacant space is a significant upside provider for Rio can and we're proving that out quarter over quarter now with some healthy leasing spreads.
Okay great.
Relative to like it's an actual number.
Already in debt.
It's not it's.
It's not based on some I don't know if CPI or some other benchmark. While there are some renewal clauses in leases that will say its going to be X plus CPI, but the consistency throughout all fixed renewals is there is a number that is set.
The only variable could be in some cases, CPI, but thats very limited usually it's just a set number that had been pre negotiated.
Okay, Okay that makes sense.
I just wanted to turn on disposition.
It's a pretty good cap rates overall I guess there was one property I think it was the partial disposition.
On the team with a cap rate, but that's I guess, that's one of those properties you talked about earlier on.
With maybe dragging down same property growth and Youre looking to dispose of.
Yes, I think that that's accurate I'm, not sure, specifically, which property youre, referring to but there there are like I said before there are qualitative aspect.
Oh, Yeah, that's right. So we have made some decisions on assets, where we're selling them at higher cap rates.
It's not it might not be specifically in line with our FRS values, but on balance it's the right thing to do for the future of the organization because we see a future that has.
That has some troubling elements to it and it will impact same property NOI going forward and take up a significant amount of capital in certain cases, and human capital as well. So in those cases, we elect to sell them as we did it.
The real cantankerous site.
In Quebec, it's not the greatest cap rate, but from a qualitative perspective, it'll help us going forward.
Alright, great and for those secondary assets, you're still you still have on the pipeline maybe those that have capex and net range are those or do you have to do you find that lately you've had to market them heavily are they are you getting approached actually by I don't know private buyers or.
Sure.
Are there other people looking for maybe higher cap rates.
Great question on the interesting thing was that once we reached our target of 90% major market focus we sort of turn the tap off a little bit on our aggressive disposition program in secondary markets. So what youre seeing in our list of dispositions that do constitute secondary market sales a lot of those have been off market approaches we have not been.
Actively marketing a lot of these assets there is the rare exception, but for the most part. These are just approaches from local individuals' private individuals and Theyre very enticing and we will follow through on the deal that they are so it is actually.
From a passive approach we've taken on some of those assets.
That's very interesting.
And just last one from me maybe on debt to EBITDA can you just.
I guess more on disposition.
$540 million, you've disposed can you just talk about that.
How much do you expect to see going down to paying down debt.
Maybe how much for development.
I think most of those actually targeting to pay down debt debt, depending on EMEA and how much fleet.
Clothing, yes, but thats the primary priority, yes. So the majority I'm not we can't give you a specific number but again our focus right now is making sure our balance sheet is.
Proved to the point that when we can turn to sort of more of an offensive.
Posture, our balance sheet is in great shape to make that turn.
Right right no that makes a lot of time.
Thanks for taking my questions and congrats again match on cement.
Thanks, So much Howard always a pleasure. Thank you.
And there are no further questions at this time I will now turn the call back to Mr. Gitlin for closing remarks.
Well, thank you Don and thank you everyone, who is still on the line.
So have to remind everyone that our AGM is set for May 26, and we're very much looking forward to it even though it will yet again be virtual Unfortunately, I will not have my opportunity to shine in the <unk>.
Our lives setting, but hopefully it will be just as impactful Eric. Thank you everyone for tuning in and thank you for your ongoing support.
And we look forward to speaking to you again in May and then again in the second quarter.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect everyone have a great day.
Yes.
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